By Teresa Rivas

Shares of Google (GOOG) are down about 0.5% this morning, in part due to its removal from Morgan Stanley’s Best Ideas list.

Analyst Scott Devitt and his team took Google from the list, writing that its catalysts had already played out, as part of a broader survey of the Internet sector. They lowered their industry view to In-Line, noting that while secular trends remain strong, thus far the sector’s outperformance (returns twice as high as the Nasdaq’s year to date) has come mostly from multiple expansion rather than positive estimate revisions, leaving many names simply too pricey.

From the note:

Total addressable market (TAM) appears to be spreading as the investment framework of choice: Our 2014 EBITDA estimates have increased 1-2% YTD while group enterprise value has increased 57% YTD. This can be explained by a 40% expansion in our coverage EV / Forward 2-year EBITDA multiple to 14x. We believe multiple expansion has been a consequence of investors sponsoring a growing number of stocks on the basis of a significant TAM opportunity justified by a relative valuation approach with minimal focus on risks. In our view, there may not be enough TAM for all of our companies to achieve long-term estimates and we believe we could see a return to a more valuation-sensitive investment process as the fallacy of a broadening TAM approach to investing becomes more evident to the market (2014?).

Our universe currently trades for 14x 2014 EV / Forward 2-year EBITDA vs. 11x avg. since Jan. ’06. Adjusted for EBITDA growth, our coverage trades at 0.63x vs. 0.51x avg. In our view, this indicates that either oursector is fully-valued, or that consensus growth expectations are too low. We believe that growth needs to accelerate to justify recent performance, the absence of which could lead the group multiple to revert to the mean.

That said, Devitt and his team still maintained an Outperform rating on Google, with a $1,075 price target. Indeed, they write that on a relative basis they prefer “large-cap, bellwether names with attractive growth adjusted for valuation.” Along with Google, these include Priceline (PCLN), eBay (EBAY), Amazon (AMZN), LinkedIn (LNKD), Facebook (FB), as well as Groupon (GRPN) and Pandora (P).

Copyright 2017 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit